Busy morning over at Quadrangle Scandal Central. To sum up, before looking forward:
1. The SEC sued Quadrangle Group for its role in the New York pay-to-play scandal. Specifically, it accused Quadrangle of agreeing funneling cash to the the brother of a state pension fund official, for the production of a straight-to-DVD film called Chooch.
2. Quadrangle Group settled with the SEC, agreeing to pay $5 million in penalties. This sue/settle process apparently is standard operating procedure for the SEC, although the settlement is still subject to a judge’s approval.
3. Quadrangle Group also settled with NY Attorney General Andrew Cuomo, agreeing to repay $7 million and sign a “code of conduct” which would preclude Quadrangle from using placement agents going forward. This deal did not include a settlement with Quadrangle co-founder Steve Rattner (who left last year to become Obama’s car czar), whom Quadrangle called “unethical” in an official statement.
Ok, them’s the facts. Now some thoughts:
1. Quadrangle has been desperate to strike the Cuomo deal since the middle of last year, in order to put this sordid mess behind it. Its problem was that Cuomo didn’t want Quadrangle without Rattner, thus further straining the relationship between the firm and its onetime partner. Not sure why Cuomo changed his tune, but a source tells me that today’s settlement was “on the AG’s timetable, not Quadrangle’s.”
2. Quadrangle’s decision to explicitly disassociate from Rattner — and explicitly blame him for all wrongdoing — is an attempt to save itself as an ongoing concern. The firm dodged a major bullet last year when LPs didn’t ratify a proposal to prematurely end the investment period on Quadrangle’s second fund, but its ability to raise future funds was very much in doubt. To that end, my Reuters colleague Megan Davies reports that Quadrangle will indeed attempt to raise a third fund — after meeting with limited partners in an attempt to repair the damage.
3. The Monument Group should be pissed off this morning. Boston-based Monument is the legitimate placement agent that raised almost all of Quadrangle’s second fund, save for the shady stuff between Rattner and New York. Now, Quadrangle is basically agreeing with Cuomo’s sentiment that placement agents are a highway to corruption. In other words: “Thanks for helping out Monument, now we’re gonna throw you and your peers under the bus.”
4. Quadrangle agreed to repay a total of $12 million, and is saying that the money will come “from the general partner.” What is unclear, however, is what “from the general partner” means.
We know that Quadrangle is not asking LPs for $12 million in new capital, which is good news. On the other hand, does “from the GP” mean that existing Quadrangle executives are reaching deep into their personal bank accounts? Perhaps selling a house or two?
Or does it mean that Quadrangle will, in part, tap monies derived from fund management fees — which were provided in order to keep the lights on, support due diligence, etc. If so, then LPs are indirectly funding Quadrangle’s misdealings.